Liberalizations and deregulation of the financial sector, the greater use of financial engineering techniques and models, significant advances in information technology and consumer demands have all resulted in greater competition and better pricing. As a result, banks started identifying new channels to improve their non-interest income by exploiting convergence in the financial industry and financial liberalization.
Bancassurance as an alternative distribution channel was identified as a source of improving the non-interest income of banks. Since banking services, insurance setting and fund management are all interrelated activities and have inherent synergies, selling of insurance by banks would be mutually beneficial for both banks and insurance companies.
Now a days, banks in many countries are permitted to engage in securities business as well as insurance. Hence, there is a room for bancassurance where banking and insurance congregate with each other.
Origin of Bancassurance in India:
Bancassurance as a concept first began in India when the insurance industry opened up to private partnership in December 1999. The Government of India, during its notification dated 3rd August 2000,has accepted insurance as an acceptable form of banking under the Banking Regulation Act,1949.
The Reserve Bank of India too has approved bancassurance by allowing banks to offer physical infrastructure to insurance companies with in the premises of selected branches and allowing them to sell their insurance products to the banks customers.
Bancassurance refers to a bank selling insurance products through its own insurance subsidiary /allied company /any other insurer. Bancassurance, in its simplest form, is distribution of insurance products through a bank’s branch network. It is a service that can fulfill both banking and insurance needs at the same time. There are two types of bancassurance namely with risk participation and without risk participation.
Indian Insurance in the Global Scenario:
Globally, the share of the life insurance business in total premium was 56.2 per cent. However, the share of life insurance business for India was very high at 79.6 per cent while the share of non-life insurance business was small at 20.4 per cent.
In life insurance business, India is marked 11th among the 88 countries, for which data is published by Swiss Re. India’s share in global life insurance market was 2.00 percent during 2013. However, during 2013, the life insurance premium in India declined by 0.5 percent (Inflation adjusted) when global life insurance premium increased by 0.7 per cent.
The Indian non-life -insurance sector witnessed a growth of 4.1 per cent (inflation adjusted) during 2013.During the same period, the growth in global non-life premium was 2.3 per cent. However, the share of Indian non-life insurance premium was small at 0.66 per cent and India ranks 21st in global non-life insurance markets.
Indian Insurance Market:
At the end of March 2014, there are 53 insurance companies operating in India of which 24 are in the life insurance business and 28 are in non-life insurance business. In addition, GIC is the sole national reinsurer.
Out of 53 companies presently in operation, eight are in the public sector- two are specialized insurers namely ECGC and AIC. One in life insurance and one in reinsurance. The remaining forty five companies are in the private sector.
The market share of LIC increased from 72.7 per cent in 2012-2013 to 75.39 per cent in 2013-2014 based on total premium income. Accordingly, the market share of private insurers has declined from 27.30 per cent in 2012-2013 to 24.61 per cent in.
Bancassurance – The Indian Scenario:
Both banks and insurance companies are looking at each other to generate now sources of income their customer accounts. The Indian middle-class segment is the second largest in the world after china. Perhaps tantalized by this potential, many foreign players are eager to enter the Indian market. It is estimated that through bancassurance, banks could collectively receive a fee based income of Rs.13,500 crores and Rs.22,000 crores over the next five years.
Many banks and financial institutions have set up joint ventures with foreign insurance companies i.e., SBI Life (with Cardiff of France), Metlife India (Metlife and J & K amongst others) ICICI Prudential (with ICICI), HDFC Standard Life (with HDFC) etc.,Companies like Aviva, Metlife, Birla Sun Life, SBI Life, etc., see bancassurance as an important channel for distribution.
Banks have got a wide retail network which can be exclusively used by these insurance companies to sell their products. India’s public sector banks account for approximately 92% of the total network. Among other things, the network involves 33000 rural branches and 14000 semi-urban branches where insurance penetration is largely untapped.
Success of Bancassurance in India:
The success of bancassurance in India is that banks are not required to look outside their own captive customer base to sell insurance. Further, banks represent a symbol of faith and trust where the customer puts his hard earned money. So the same customer obviously trusts the bank for buying life insurance.
Bancassurance is the distribution of insurance products by banks and it depends on the relationship that is established between the bank and the customer over a period of time. The bank network established in India is vast and has expertise about the financial needs and saving patterns of their customers. Banks with their huge networks and large customer bases provide insurers an opportunity to grow fast; helping them cut their start-up costs.
This situation is mutually beneficial to both the banks and the insurance companies. In non-monetary terms, the banks get an opportunity to extend a wide range of products that are available with them to the customer while the insurers benefit from the wide network and customer database that the bank has built overtime.
On the other hand, in monetary terms, the banks receive a fee based income on the policies they sell while the insurance companies will receive timely payments.
Banks are technology savvy now and competing with each other on the service front. They should train and equip their staff with backing of technology to deliver the requirements.
Operational Challenges of Bancassurance:
At present, banks in India do not have any integration with the insurers live database to know the status of any insurance proposal. Many proposals, therefore, hang for want of further information with regard to financial and medical underwriting.
Banks are finding it difficult to replicate successfully what individual agents do for insurance companies like reminding the prospects about the payments of renewal premiums on the due date and ensure its remittance.
Another vital area that tests the bancassurance tie-ups of the players concerned would be the rate of claim settlements while banks might expect quick claim settlement on account of the banking relationships with the customer, the insurance company may do so only after exercising the required safeguards.
Another challenge before the insurance company is how to develop a technology that would enable them to access and efficiently use the database of banks customers.
One more challenge for bancassurance is how to stop the unhealthy practices resorted to by a few agents to somehow procure business.
A Swot Analysis of Bancassurance In India
Bancassurance has lots of strengths, weaknesses, opportunities and threats.
- There is a vast untapped potential available, particularly for life insurance products.
- 1500 million(approx) lives waiting to be given a life cover.
- About 800 (approx) million households waiting to be approached for Householder’s insurance policy
- Millions of people of India can be tapped for overseas medi claim and travel insurance policies.
- Insurance companies world wide are looking now to the middle market segment which is the second largest in the world after china.
- India has a huge pool of skilled professionals. So, there is great scope for any bancassurance venture
- There is also great scope for R&d to create new products with a minimal in the beginning.
- The IT Culture is unfortunately missing completely in all future collaborations i.e., banks, GIC and LIC due to late entry.
- Internet connection is not available even to the managers of operating offices
- Inflationary pressures and the tax net today overburden the middle class population
- Products are not tailor made to the requirements of the customer
- Banks database is enormous.
- There is already an atmosphere created in the country for liberalization of Insurance industry
- RBI OR IRDA should have no hesitation in allowing the merger of the two.
- Success of a bancassurance venture requires change in approach, thinking and work culture on the part of everybody involved.
- There is a definite threat of resistance to any change that bancassurance may set in due to the traditional way of working style.
- Another possible threat may come from non-response from the target customers.
- The investors of capital may turn their face off incase the rate of return on capital falls short of the existing rate of return on capital.
- There will be fierce competition in the market if the unholy alliances are allowed to take place. This may lower the prices and the bancassurance ventures may never break even.
It can be concluded that Bancassurance is becoming important for both the insurance companies and the banks in India. The further growth of bancassurance hinges on how well the bank and the insurance company are able to overcome the operational challenges that are being consistently thrown to them.